India growth could be even better

India’s growth continues – but with the right things in place, could be even better.

Economic growth in India is expected to remain below potential in 2025 amid a challenging global environment – giving credence to calls for increased policy support. Falling inflation, a disciplined fiscal stance and structurally low current account deficit mean the policy rate can still go lower, and bond yields will follow suit.

ANZ Research has upgraded its growth forecast for India in the fiscal year ending March 2026 to 6.1 per cent, up from 5.7 per cent. The update reflects abated global trade risks, hopes of a US-India ‘mini’ trade deal in July, and a strong first-quarter gross domestic product reading.

First-quarter Indian GDP growth at 7.5 per cent came in above expectations in May. Full-year growth averaged 6.5 per cent, vindicating the Reserve Bank of India’s (RBI) forecast, but a few aspects stood out.

The contribution from net foreign trade and public capex was strong, whereas private consumer spending didn’t grow as well as expected on the back of rural demand revival. In other words, the pulse for private domestic demand growth was weaker than the headline GDP, and some moderation is likely on the cards.

On the radar

External demand risks are still on the radar for the second half of fiscal 2026, thanks to an expected slowdown in the US economy. Import growth could hold up relatively better. Weak manufacturing performance in the recent months echoes these concerns.

Public capex growth in fiscal 2026 will continue to normalise, bound by fiscal deficit constraints. Private business capex may remain on the backfoot amid economic and policy uncertainty, and ANZ Research believes the private real estate demand cycle is past its peak. While not currently weak, it is in a correction phase. The investment rate is expected to remain below 34 per cent of GDP.

Much hope is being pinned to private consumption. High farm output growth in the past few quarters and a robust view for this year’s agricultural performance augur well for rural demand.

Real rural wage growth has also inched up with falling Consumer Price Index (CPI) inflation. However, urban consumption growth may remain stable – while borrowing costs have eased, income growth has likely slowed. Household balance sheets remain stretched due to the personal borrowing spree over the last few years. Some deleveraging is now on the cards.

At the time of writing, high frequency growth indicators are not exhibiting any clear improvement, making it difficult to expect higher growth in fiscal 2026. ANZ Research’s growth forecast is below market expectations and the RBI’s view.

ANZ Research expects consumer price index inflation to come in at 3.3 per cent, 40 basis points below the RBI’s latest forecast in the fiscal year 2026. The base effect for food CPI is highly favourable and the cobweb cycle for pulses is playing out strongly, leading to a sharp disinflation. If the southwest monsoon does not disappoint in terms of total rainfall, and its temporal and spatial distributions, food inflation is expected to remain benign. On the other hand, core inflation (even excluding gold) will likely remain ascendant.

ANZ Research’s model predicts core inflation excluding gold could rise above 4 per cent by the end of 2025 and settle around 4.5 per cent thereafter. The RBI will be mindful of this headline-core inflation divergence. In India, whenever the two diverge for a long period, headline inflation usually catches up with core inflation.

Far below

Even with weaker exports in the picture and relative import strength, ANZ Research expects India’s current account deficit for fiscal 2026 to come in at 1 per cent of GDP, far below the sustainable and equilibrium level of 2 per cent to 2.5 per cent of GDP for India’s stage of economic development. A strong services trade surplus and rising remittance inflows will continue to mitigate a wide goods trade deficit.

After a disappointing performance in 2025, ANZ Research expects foreign direct investment and foreign portfolio investment inflows to remain muted as well. Global financial markets could remain volatile and geopolitical risks may continue to feature in portfolio decisions. This means India’s balance of payments position may remain weak, if not negative in fiscal 2026.

The RBI turned neutral at its June policy meeting, highlighting limited policy space to support growth going forward. It has lowered the repo rate by 100 basis points in the current cycle, besides flushing the banking system with durable liquidity.

A neutral stance means data dependency for future rate action with no explicit bias to cut or hike. We think the RBI’s confidence on growth can get tested, and there is scope for one more 25 basis-point rate cut in the fourth quarter of 2025. This also means a potential but limited downside to the benchmark yield.

It will be interesting to see how the RBI decides to regulate liquidity in its neutral stance. It is likely the central bank will let banking liquidity taper off, allowing the weighted average call rate to gradually align with the repurchase rate rather than undershooting. The RBI's recent steps to reduce the liquidity surplus validate this view.

Banking liquidity is currently above 1 per cent of net demand and time liabilities, which is essential for rate cut transmission to continue.

ANZ Research expects the government to adhere to its 4.4 per cent of GDP deficit target for fiscal 2026. From 2027 onwards, the government will switch to medium-term debt targeting, making the fiscal deficit target endogenous to the debt target.

In the baseline scenario, ANZ Research does not foresee the fiscal deficit-to-GDP ratio falling below 4 per cent over the forecast horizon.

Dhiraj Nim is an Economist at ANZ Research

This is an edited excerpt from the ANZ Research report “ANZ Research Quarterly: shaken, but not a shambles”, published June 25, 2025